In 2019, investor support for shareholder proposals related to environmental, social and governance matters reached a record average high of 29%, according to Morningstar. And that doesn’t take into account the number of climate-related proposals that were withdrawn after successful negotiation—a number that exceeded the number of climate proposals that actually went to a vote. In this report, Morningstar analyzes the level of proxy voting support by 52 of the largest fund families for ESG-related shareholder proposals in 2019 and over the five years from 2015 to 2019. Although Morningstar finds substantial increases in average support over the last five years, five of the largest fund families, including BlackRock, voted against over 88% of ESG-related proposals, enough to prevent many of these proposals from achieving majority support. But, in 2020, with BlackRock having joined Climate Action 100+— reportedly “the world’s largest group of investors by assets pressuring companies to act on climate change”—and having announced that it was putting “sustainability at the center of [BlackRock’s] investment approach,” the question is whether that voting strategy is about to change?
As framed by Morningstar (and others), the transition to passive investment through index funds means that, without the possibility of selling out of a stock position, the only way for these fund managers “to influence shareholder value at the company or system level is through exercising active ownership rights. A failure to actively monitor investee companies and shape governance practices to address sustainability risks could lead to vulnerabilities across markets.” As a result, these funds are likely to weigh in on ESG issues though engagement and voting.
Morningstar used its fund voting data to examine votes by more than 2,000 funds offered within 52 of the largest fund families on ESG shareholder proposals in 2019 and over the past five proxy seasons (1,033 proposals). (Funds with ESG mandates were excluded.) Morningstar found that average support for ESG proposals by asset managers has increased every year since 2015 and over the five-year period from 27% in 2015 to 46% in 2019. The report includes tables showing the 10 fund families that were the most supportive and the 10 that were the least supportive over the five years, including, as noted above, funds from Vanguard (4% support) and BlackRock (3% support). Morningstar reports that 15 of the 52 fund groups increased their support for ESG proposals in 2019 by more than 20 points over their previous four-year averages. For example, Fidelity index funds abstained entirely in 2015 and 2016, voted in favor on 7% of ESG proposals in 2017 and then voted in favor of 30% of ESG proposals in 2018 and 53% in 2019. In addition, only 12 fund families supported more than half of the proposals in 2015, compared to 25 fund families in 2019.
Notwithstanding these increases in support, across the board, Morningstar observes that “funds offered by the largest asset managers continue to lag those of their smaller peers by a wide margin. As a group, the largest of the asset managers are the least likely to support ESG shareholder-sponsored ballot initiatives.” Morningstar attributes the lower levels of support among the largest asset managers to their historic “reluctan[ce] to vote against management both on shareholder- and management-sponsored ballot items. The upward trend in asset-manager support for shareholder-initiated ESG resolutions reflects rapidly changing investor attitudes toward the materiality of the sustainability issues that these resolutions address. It shows that asset managers, as a group, are becoming increasingly willing to use their proxy votes to support transparency and better governance of sustainability concerns.”
Taking a deeper dive into the data for 2019, Morningstar identified 12 ESG issues—climate change, cybersecurity, diversity, environmental stewardship (generally, environmental impact of corporate and supply chain operations), sustainable governance (e.g., requests for board committees with oversight over climate, human rights, etc.), gender pay equity, human rights, lobbying, political spending, reputational risks of products, governance of workplace sexual harassment claims and other—and examined how fund groups voted in each category.
For example, proposals related to reputational risks of products (guns, opioids) garnered substantial support. Of the 48 fund families voting on one or more of these proposals, 34 supported all proposals. Gender and pay equity proposals also received strong support, with fund families supporting these proposals on average 71% of the time. Looked at separately, however, proposals regarding gender pay gaps received an average of 48% support from asset managers. Political spending and lobbying proposals “were supported, on average, 53% of the time by the fund groups surveyed. Eleven fund groups, however, failed to support a single political-spending resolution.” Morningstar reports that “votes on climate risk, environmental stewardship, and human rights were strongly correlated, averaging 51%, 42%, and 41% average support, respectively, across the 52 fund groups.” Five of the 52 fund families supported all of the climate proposals on which they voted, 16 supported at least 75% and 25 supported at least half. In contrast, BlackRock and Vanguard each supported four of the 16 climate proposals.
Although the data demonstrate growing support of ESG proposals among these large fund families in general, Morningstar observes that “the overall impact on actual vote outcomes of this growing asset-manager support is tempered somewhat by the less-supportive voting of the largest asset managers. The largest asset managers are generally far less inclined to vote for sustainability resolutions and yet they have many times the impact on the vote than their smaller peers—and their impact is growing.” In its survey, Morningstar found that, of “the 10 largest U.S. fund families, five supported ESG resolutions less than 12% of the time. The largest and second largest fund providers in the U.S., Vanguard and BlackRock, respectively, each only supported 7% of ESG proposals…” What’s more, this low level of vote support has kept vote totals low in many cases and, in some cases, it has led to failure to achieve a majority vote: “In a significant number of cases a vote by just one large asset manager would have tipped the vote outcome on a resolution to a majority vote for the motion. For many public companies, a large fund group may hold (on behalf of fundholders) 10% or more of shares outstanding. In 13 out of the 23 cases where an ESG resolution failed by 10% or less in 2019, Vanguard held a stake in the company of more than 10%. For BlackRock, this was true in four instances. Of the 23 ESG resolutions that achieved between 40% and 50% support, 19 would have passed if supported by Vanguard, and 15 would have passed if supported by BlackRock.”